Minister cautious over Westpac report calling for break up of Countdown and Foodstuffs

Thursday, 11 May 2023

Westpac’s report said a supermarket break-up could push up prices in the short term, but lead to better prices, a wider range of goods and an improved customer experience after that.

Commerce Minister Duncan Webb has reacted cautiously to a call from Westpac to break up supermarket giants Countdown and Foodstuffs, however the Green Party has endorsed the advice.

Webb suggested a forced break-up remained an option down the track, but that the Government would first want to see if other reforms it had approved led to a better deal for shoppers.

Westpac’s economics team said the Government needed to order a break-up of the supermarket duopoly if it wanted to significantly improve competition in the industry.

The report, produced by Westpac industry economist Paul Clark, recommended Countdown and Foodstuffs be forced to sell some of their retail chains and perhaps some individual stores.

It also advised they be required to split into separate manufacturing, wholesaling and retailing businesses, so the duopoly would need to “choose where it wants to operate and sell off those parts that it doesn’t”.

Former Food & Grocery Council boss Katherine Rich voiced her concerns about supermarket covenants in June.

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Green Party commerce spokesperson Ricardo Menendez March said Westpac’s report matched its own thinking.

“The report agrees with what the Green Party has been saying for a really long time: that the time is now to break up the supermarket duopoly.”

But Webb noted other reforms ordered by the Government were still being implemented.

“Divestment and splitting up the supermarkets is a big call and the Westpac report notes it would increase prices in the short term,” he said.

“Given how high prices are at the moment we would not take any action that would add to them now,” he said.

However, Webb said forced divestment remained “an option on the table” while it monitored the effectiveness of its current reforms.

“Ultimately if supermarket competition doesn’t improve enough with our existing programme of work we would want to look at what more we can do to get a better deal for shoppers,” he said.

Commerce Minister Duncan Webb says breaking up Countdown and Foodstuffs would be a “big call”, indicating it was not one that the Government was currently ready to make.

Westpac’s report noted that the Government had already introduced a raft of reforms, including one that will force Countdown and Foodstuffs to wholesale groceries on terms that could potentially be set by regulation.

Former prime minister Jacinda Ardern said in August that would “unlock the stockroom doors” of Countdown and Foodstuffs’ Pak ‘n Save and New World supermarkets.

But Westpac’s report said that while the proposed reforms had been touted as being transformative, it did not think they would generate sufficient competition to deliver significant benefits to consumers.

“Stronger measures will be required to generate enough competition to deliver the outcomes that the Government seeks,” it said.

“Our view is that this can only be achieved by introducing more competition throughout the grocery value chain and hence breaking up the existing duopoly.”

That view appears to echo the stance of competition advocate Tex Edwards, who reiterated his view in February that only a break-up of the two supermarket groups would entice a third “like for like” challenger that could bring down grocery prices.

Edwards had been a relatively lone voice up to now in actively lobbying for such more radical interventions.

Former commerce minister David Clark had expected to make a recommendation to Cabinet in October on whether to invite public consultations on a break-up of Countdown and Foodstuffs.

That decision was to be informed by a cost-benefit analysis that was completed by the Ministry of Business, Innovation and Employment (MBIE) into the options for forced divestment last year.

A spokesperson for Webb, who succeeded Clark as Commerce Minister in February, said no Cabinet decisions had been made on divestment.

The MBIE study has yet to be released, but Webb said in March that MBIE’s modelling was “extremely uncertain” and divestment would require “a lot of government energy”.

“The challenge is there are ‘outlier scenarios’ where everyone is worse off, so this is what we're working through.

“To decrease the wealth of the supermarkets and decrease the wealth of the consumer would be a catastrophe,” he said then.

Westpac’s report acknowledged that following its advice could potentially lead to higher grocery prices in the short term as economies of scale in the supermarket industry were compromised.

“Longer-term, however, we would expect the benefits of a more level competitive playing field to be reflected in better prices, a wider range of goods and an improved customer experience,” it said.

Its report also said the Government should create conditions to encourage online grocery shopping.

Paul Clark said its report represented the views of Westpac’s economic research team and that other parts of the bank might have different views.

A Countdown spokesperson said it was not sure why Westpac had chosen to prepare and release its report now, given it didn’t make a submission on the Government’s reform package or during a market study conducted by the Commerce Commission into the industry.

She noted the Commerce Commission’s market study had stated that forcing the supermarket groups to sell off stores to assist one or more new entrants would be “unprecedented internationally” and that it also said it couldn’t conclude the benefits would outweigh the costs.

The commission had said the latter was based on the information available to it at the time of its study last year.

Foodstuffs spokesperson Emma Wooster said Westpac’s report had “come out of left field and we’ve had no engagement with them at any stage to support their research”.

“In recent years, the supermarket industry has been the most scrutinised in New Zealand,” she said.

“While we always welcome external input that enables our co-operatives to increase the value for our customers, we feel Westpac’s suggestions won’t have the impact they propose and would likely result in higher prices for consumers.”

Forced divestment had never been ordered before in New Zealand and could “destabilise” Foodstuffs’ cooperatives, she said.